To beat market, Byrne buying on dividend raises

Published Wed, Jan 14 20156:00 AM EST

Susan Byrne, a member of the "Squawk Box" inaugural Portfolio Challenge , likes three companies that each raised their dividends three times each over the last decade. "We continue to favor companies with strong positive cash flow that can support dividend increases each year even in slow and uneven economic times," the founder and chairman of Westwood Holdings said. The firm has held each of the stocks for more than six months. Byrne said she picked stocks with price multiples of 14 to 15 times their 2015 earnings per share, below the market multiple of 18. That undervaluation, coupled with strong balance sheets, means more dividend increases are coming, she said. Here are her picks: Honeywell Currently yields 2.1 percent, and has grown dividend about 10 percent less than market multiple. Honeywell operates as a diversified technology and manufacturing company that offers process controls for the aerospace, security and energy industries. The stock is a long-cycle industrial name that should benefit from a rebound in the aerospace market, particularly in after-market components. The stock also has more short-cycle exposure than many of their peers due to their automotive exposure, which should help them outperform in the near term. Qualcomm Currently yields 2.4 percent, with nearly 20 percent growth in its dividend over the last five years. A deal with China on royalties should be finished in 2015. Qualcomm is a pioneer of wireless technology and monetizes its research investments through licensing and royalty agreements with wireless device manufacturers. The firm has two segments: chipsets sold to wireless phone/tablet manufacturers; and royalties and license fees from manufacturers selling wireless devices based on CDMA or 3G/4G technologies. The company also has a strong patent portfolio and will continue to profit from global smartphone growth, with excellent cash returns and a reasonable valuation. Franklin Resources Currently yields 2 percent and should benefit from a combination of domestic funds and International Funds (Templeton). Franklin is a large, diversified investment manager with a broad range of strategies, including domestic and global equity, fixed income, tax-advantaged products and hybrid products. Superior performance should continue to lead to inflows. The stock is attractively trading at eight times EV/EBITDA and has a free cash flow yield of more than 7 percent. Fear is that its asset inflow has been concentrated in its global fixed income strategies, and rising global rates would dampen the inflow prospects. In reality, the company's franchise is more diversified than feared with 50/50 in equity/fixed income. Its flagship Global Bond and Global Total Return funds are still enjoying strong performance with top quartile over one year and top decile performances over three years. The stock has factored in lots of the fear about flows, and any positive inflow would be viewed positively by the market.

Roslan Rahman | AFP | Getty Images

Susan Byrne, a member of the "Squawk Box" inaugural Portfolio Challenge, likes three companies that each raised their dividends three times each over the last decade.

"We continue to favor companies with strong positive cash flow that can support dividend increases each year even in slow and uneven economic times," the founder and chairman of Westwood Holdings said. The firm has held each of the stocks for more than six months.

NEXT PRO TALK

5 Days Remaining

Wed, Apr 24 2024 - 1:30am

Amazon, LVMH and more: Fund manager reveals the consumer stocks to buy right now